Do Politically Connected Outside Directors Influence Firm Performance?

Abstract

[Purpose] This study investigates how the politically connected outside directors affect firm performance. [Methodology] The control and firm performance variables are obtained from the DataGuide and TS2000. The data of politically connected outside directors are manually hand－collected from annual reports available in DART. We examine the KOSPI manufacturing firms from 2011 to 2015 and use propensity score matched pair research method. [Findings] We find that politically connected outside directors play an important role in improving a firm’s Tobin’s Q, operating cash flow, and return on assets. This result supports the monitoring/advising view, suggesting that politically connected outside directors may have a positive effect on firm performance. [Implications] This study contributes to the understanding of the link between political connections and firm performance. Given that academic studies on the effect of political connections on firm performance remain ambiguous, our findings indicate that politically connected outside directors help firms improve valuation and accounting performance in Korea.